US wine producers, already suffering from oversupply, fear effects of war

AFP , NEW YORK

The war in Iraq threatens to sour the US wine market, deepening problems caused by overproduction, which has dragged down prices in the industry for the past two years.

Robert Mondavi, one of California's biggest producers, last week sounded the alarm, warning that net profits in the sector were expected to plunge 40 percent this year.

But it is not just the grape glut and the ensuing price war that are marring the industry's financial landscape. Problems in the travel sector are also posing a significant threat, according to Mondavi, whose firm has cut about 100 jobs in an effort to trim costs.

Experts say that while it is too soon to gauge any "Iraq effect" on the sector, producers who do more than 30 percent of their business with hotels and restaurants are among the most vulnerable.

That is the case for Mondavi, but also for many small producers who sell boutique wines, according to industry consultant Jon Fredrikson.

"Three or four wineries have two-thirds of the total shipments in the US, but most wineries are on a small portion of the market, selling over US$14" a bottle, Fredrikson said, noting that "small wineries are going to be more affected."

According to Mark Mazur, the New York-based director of Vinconsult, "people who buy middle wines at US$12 or US$15 may make the conscious choice to spend less and prefer spending eight or nine" in the current economic climate.

Still, most experts agree that while dining out -- both for work and for pleasure -- is becoming more of a rarity, overall wine consumption is relatively unchanged, as a result of a flurry of promotions from retailers.

"It's a little quieter, but not a terrible downturn from the retailers," Mazur said, adding: "There is a very real possibility of help for retail sales with the decision to eat less outside."

Yet for producers, the "light recovery" in supermarkets still cannot compensate for the 20 to 30 percent drop in sales over the past 18 months for restaurants, airlines, hotels and resorts, according to Rich Cartiere of the Wine Market Report.

"Everybody expects the status quo for 2003," he said.

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